Lithium Royalty Corp. (X1Q.F) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for joining us today. [Operator Instructions]. This call is being recorded on Thursday, December 19, 2024. I would now like to turn the conference over to Jonida Zaganjori, Vice President of Investor Relations at Lithium Royalty Corp. Please go ahead.

Good morning, everyone, and thank you for joining us today. We're pleased to announce that Lithium Royalty Corp. has entered into an agreement with Triple Flag Precious Metals to sell a 0.5% gross overriding revenue royalty over the Tres Quebradas lithium brine project, in Catamarca, Argentina for a total cash consideration of USD 28 million. Joining us today are Ernie Ortiz, President and CEO of Lithium Royalty Corp. and Dominique Barker, Chief Financial Officer at LRC, who will discuss the details of the transaction. After the prepared remarks, we will transition to a Q&A session where our executive team will respond to your questions. We would like to remind participants that today's commentary may contain forward-looking information. For more details and other important notices, please refer to our press release from this morning available on our website and on SEDAR+. I will now turn the call over to Ernie.

Thank you, Jonida, and good morning, everyone. Thank you for dialing into today's conference call on short notice to discuss the Tres Quebradas transaction. As announced earlier today, we have sold a 0.5% gross overwriting revenue royalty on Zijin Mining's Tres Quebradas project located in Catamarca, Argentina for a cash consideration of $28 million. First and foremost, I want to express what a pleasure it has been collaborating with the Triple Flag Precious Metals team on this transaction. We view them as a great partner for Lithium Royalty Corp. We are pleased to announce this milestone transaction, which we believe has multiple benefits for our shareholders. First, the transaction represents a meaningful injection of capital into LRC's balance sheet, which is debt free. Strengthening our balance sheet at a cyclical low in the lithium market allows us the opportunity to capitalize on attractive valuation in the lithium industry for future potential transactions. Second, the transaction daylights the value of the Tres Quebradas Royalty. While there are many ways to value a loyalty and our entire portfolio, there is nothing as concrete or meaningful the transaction with a third party. We believe this transaction values the Tres Quebradas royalty at a material premium to what is represented in our current share price for this asset. Importantly, we will continue to own a 0.9% revenue royalty on the same Tres Quebradas project and will continue to benefit from the future cash flows of the projects. Third, this transaction also serves to highlight the value of the other 34 royalties that we own. To further this point, we believe our portfolio is made up of not just one, but many of the world's best lithium endowments with high-grade, low-cost and long asset life characteristics. Fourth, the transaction allowed us to affect a rebalancing of the portfolio and can continue to do business in Argentina, while being mindful of country and single asset risk, which to us are key attributes to prudent risk and portfolio management. And finally, we believe this transaction continues to validate the LRC business model. LRC leveraged its first-mover advantage in the lithium royalty sector. And as the industry continues to mature, LRC is well positioned to collaborate with like-minded partners to amplify our growth potential. In fact, in the past 6 months, we have seen more inbounds from parties about potential co-investments for future lithium royalty transactions than ever before. As far as the use of proceeds, we expect to both acquire new royalties with the near-term cash flow bias as we've discussed previously and repurchased LRC shares. With regards to the share repurchases, I'd like to point out that while on the one hand, we are reducing the size of our exposure to a world-class, long-life, top-tier asset. We now have the ability to go out and acquire more top-quality assets and more of all 35 royalties that we currently own by buying back our own shares. We estimate that buying back our own shares represents more than 20% internal rate of return to shareholders at the current share price for a diversified portfolio of long-duration assets. We spent years building this business and acquiring top-tier assets. So the ability to add more exposure on a per share basis is very accretive for shareholders and a very compelling low-cost opportunity for management to execute on. Of course, it is not lost enough, that the significant movement in the relationship between the Canadian dollar, the currency in which our shares trade, and the United States dollar, the currency of the proceeds from this transaction makes things even more compelling for our buyback. As we mentioned previously, we believe that 2025 will be an important year for Lithium Royalty Corp. As we have three new assets expected to contribute meaningful revenue growth via Tres Quebradas operated by Zijin, Das Neves operated by Atlas and Mariana operated by Ganfeng. In addition, Sigma is progressing with their Phase 2 expansion at Grota do Cirilo set for production in the second half of 2025. Buying back our shares allows us to grow our exposure to these low-cost assets along with the optionality of our other assets in the portfolio asset cycle low. Before I turn it over to Dominique, I would like to share a quick summary on our recent site visit to Argentina in November. Zijin was a gracious and welcoming host to our team as we toured both the chemical plant in Fiambalá and the Tres Quebradas solar. We were impressed by the progress that Zijin has made in the short amount of time that they've owned the asset. The facility is a world-class and a testament to Zijin's commitment to Tres Quebradas. Zijin reaffirm their plans to begin production in 2025 and the ability to expand production to 50,000 tonnes per year following the initial Phase 1 nameplate capacity of 20,000 tonnes per year. Zijin is investing in a solar plant at the chemical site, which would further optimize operations in the new year. Zijin is optimistic on the outlook for the RIGI Investment regime and could apply to it for its Phase 2 expansion program. Overall, we felt the optimism firsthand on our visit to Argentina and note that the stabilizing inflation regime, growing USD reserves and goal to remove capital controls in 2025, all point to a reduced risk premium for Argentina. I will now pass back to Dominique who will discuss the financial details of the transaction.

Thank you, Ernie. We believe the deal we announced today with Triple Flag Precious Metals on the Tres Quebradas project will provide the market with confidence in LRCs capital allocation decisions. We've elected to daylight the value and to show the market that our internal view of value remains consistent despite a severe decline in the price of lithium since our IPO in March 2023. I would like to point out to Rio Tinto's recent announcement to proceed with Rincon in Argentina with approval to spend $2.5 billion there, as well as our recent M&A activity, reaching a deal to acquire one of our portfolio companies, Arcadium earlier this fall as further proof points. And not to mention yesterday's announcement by VW to invest in Patriot Resources. As Ernie noted, we will maintain a net 0.9% core royalty interest on Tres Quebradas. Following the transaction, Tres Quebradas remains the largest component of our NAV reducing our single asset exposure from 22% to 16%. Sigma remains our second largest contributor to NAV with a pro forma moving to 10% of our estimated NAV. We welcome having a partner such as Triple Flag as a co-royalty investor. Upon completion of the transaction, which we target to finalize in the first quarter of 2025, our pro forma cash balance based on our estimate for cash at December 31 year-end of USD 6.7 million will increase to USD 34.3 million. This will allow us to allocate capital to where we see fit, including, as Ernie said, purchasing our own shares and also acquiring additional royalties. The sale has been structured with the consideration of tax implications, and we do not anticipate any cash tax payments related to this transaction. Jonida, I'll pass it back to you to handle the Q&A. Thank you.

Operator, can you please open up the line for Q&A?

Yes.Thank you. Ladies and gentlemen, we will now begin a question-and-answer session. [Operator Instructions]. Your first question is from Ben Isaacson from Scotiabank.

This is Apurva Kilambi on for Ben. So my question is on the Q3 call, we heard you say that you're starting to see some additional competition versus when you first started in 2018. You highlighted that your priorities are either assets that are near term to cash flow or highly strategic and Tres Quebradas is arguably both given the proximity to production and the scale of the project. So you've just made a sale to what is effectively a new competitor, a Precious Metals Royalty company that wasn't previously in lithium at all. And then one that also has about $700 million of liquidity available for transactions. Do you have any concerns about what this could mean for your pipeline?

Thanks, Apurva. So no, we have no concerns. Our pipeline remains incredibly robust. It's probably been the busiest we've had it in history, especially given the cycle low that we're seeing in the sector. And I think on a big picture level, LRC remains the first-mover in the space. We have a tremendous amount of human capital and know-how. We view this as really an acknowledgment of that intellectual firepower and just how long we've been in the sector. And we are the largest lithium royalty company in the world right now. So no, we don't really view this as inviting competition. We view this as inviting partner that decided to work with LRC on this transaction in a very materially accretive way that now allows us to go out and acquire more of those assets in the pipeline. So, no, I think ultimately, we're of the view that in a fast-growing market like lithium, which is growing from about 1 million tonnes today to 3 million tonnes by 2030, according to consensus, there likely will be additional parties that provide capital to the sector. But we do remain the capital provider of choice with many companies. Many companies look to LRC not just as a financial counterparty, but also as an intellectual and adviser to given all the history that we've had in the space. So, no, we think it was a very accretive transaction for all parties. And as I alluded to in my prepared remarks, we're actually seeing many parties approach LRC to co-invest in the industry, because they recognize that we have the due diligence capabilities and expertise. We have the know-how, we have the team to really go out and acquire additional royalties, and we have the track record that's uncovered a lot of value, which we've shown today.

And Apurva, I would also just add that we are reducing our single asset exposure, like I said, from 22% to 16%. And if you include Mariana, so our exposure in Argentina, where we feel very positive, as Ernie mentioned, our Argentina exposure goes to 21%.

Thanks for that Ernie and Dominique. Happy holidays, folks, I'll leave it there.

Your next question is from Patrick Cunningham from Citi Group.

This is Rachel on for Patrick. So if I may follow up on the previous question a little bit. Why is now the timing for this kind of partial sale? Is there a long-term pricing assumptions baked into this transaction value? And is there a shift in the strategy?

So no, there's no shift in the strategy. Ultimately, the opportunity arose to complete an accretive deal that is a material accretion and premium to what is currently embedded in our share price. So I think the opportunity to enhance shareholder value and now being able to replenish the balance sheet, being able to highlight the value of our other 34 royalties, as Dominique said, rebalance the portfolio, validating LRC and now being able to do what we do best, which is acquire royalties and deliver value to shareholders is very exciting. We do have a very robust pipeline that we can go and act and also alluding also to the share buybacks that are very accretive at this level. So I think it was the right place at the right time. It was a win-win transaction for both parties. And given all the variety of benefits, management and Board felt very strong that this is the right move. And given that we also have the 0.9% revenue position remaining on this asset, we will still benefit from the royalty cash flows, and we're very excited by that.

Got it. And maybe another question. This might be a little bit early for you guys, but are there any other secondary royalties that you might be working at in order to free up balance sheet pressure and take advantage of?

So thanks, Rachel. So look, our priority is to acquire additional royalties. As we -- as I mentioned before, we have the track record where we've been able to surface a lot of value by being early and selecting the right assets that ultimately go and become world-leading lithium companies and assets. But at the same time, we are looking to maximize shareholder value. So if there is -- there are parties out there that recognize and acknowledge that we have fantastic assets with high grade, low cost with significant duration. If they recognize that in a financial way, then we would obviously take that very seriously, and the Board would have a very close investigation. So I think it depends on the value. Our priority, again, is acquire more royalties. But of course, we're commercially minded. And if other parties recognize substantial value that we have in the portfolio, we'll take a look at it very closely.

And Rachel, if I could just add, I mean, this is a job. These are to make capital allocation decisions. And so at this time, we see our current portfolio as undervalued and, therefore, not reflected in the share price. So this daylights the value, and this allows us to make decisions on potential acquisitions. And frankly, one of the more interesting acquisitions are our own shares. And so that is what is under consideration with the proceeds from this transaction.

Your next question is from Shannon Gill from Cormark Securities.

So just to follow up on Apurva and Rachel's questions here. After any kind of share buyback program, how much of that $34 million in cash do you hope to have on hand to transact on additional royalties?

Look, that's still to be determined. So we'll review as the opportunities arise. As I mentioned, our pipeline is very robust. So we don't think it's mutually exclusive, but we do want to likely act on both on acquiring additional royalties and acquire shares. So I think, as we get more information, as we explore, as we said in the press release, a substantial issuer bid, we'll provide the market with additional details. But we do think our shares are materially undervalued, and we think that it would be very accretive to purchase shares at these levels. Dominique, I don't know if you have anything to add.

Well, I would -- just on the comment. As a reminder, the royalty model is very scalable and very low cost. Just as a reminder, at the end of the third quarter, our cash position was $7.1 million, and we project -- we're almost at the end of the quarter. So we have a high degree of confidence that our cash at December 31 will be $6.7 million, as I mentioned. So this deal gives us a pro forma cash of $34.4 million after some transaction fees. And so we feel very comfortable with our current position. We have three additional cash-generating assets that will come on in 2025. And so we have lots of firepower for potential acquisitions, but also like we said, where we view very positively a potential acquisition of our own shares.

Your next question is from MAC Whale from Cormark Securities.

Ernie, you spoke a little bit about the ability to rebalance where -- can you give us some priorities in your mind, how you're going to do that? Is it primarily geographical? Or are you looking at a different place in the value chain like spodumene versus chemicals? Like can you give us some guidance on how to think about your thoughts on the relative value?

Sure. So I think, as Dominique mentioned, so the 3Q asset will go from around 22% or so to around mid-teens as pro forma for this transaction. And then Argentina will go from around 27% to around, call it, 1/5 of the portfolio. So this allows us to potentially grow in Argentina, whereas in the past, we could have continued to grow, it probably would have started to become a very large weight in the portfolio. And we do want to make sure that we have appropriate weight across many different jurisdictions and a diversified business model through a whole variety of metrics. So I think, what this allows us to do is rebalance Argentina, so that it allows us to grow further in Argentina and potentially have different counterparties and diversifying the counterparty mix as well. But that being said, we are still very interested in our broader spodumene portfolio as well. So we're looking at the core four geographies for us, which are Australia, Brazil, Canada and of course, Argentina. So we look to continue to grow in those four transactions, but -- in those four geographies, but this does allow us to grow in Argentina and probably in a more comfortable position than if it had gone to 30% plus of the portfolio, which we're probably comfortable with doing it, but this is just still a good strategic step to diversify the portfolio.

Okay. And just returning to the question of timing, was the with the opportunity more on the selling side, like you had a buyer for this asset versus timing being dictated by an opportunity to buy something? It sounds that -- it sounds it's more of the former than the latter. Is that correct?

No, I would say it's both. Look, it was a bilaterally negotiated deal. That being said, we do speak to multiple parties from time to time, but we thought the conversation with Triple Flag were very serious and they're very straightforward. So it was a pleasure to deal with them. The fact that they also have a position already with Zijin, I think, made things a lot smoother as well. So being able to deliver an accretive transaction at the cycle low, I think, has multiple benefits. So I think, it was for those variety of benefits that we mentioned that why we wanted to go ahead and transact. But we do have several opportunities that we've been developing recently and a lot of them are in the near-term cash flow phase. So we'll look to progress them and see where we get to. But I would say this is for a variety of reasons that we felt so strongly this is the right decision to do.

Great. Thanks and congratulations, guys.

[Operator Instructions]. And your next question is from Mohamed Sidibe from National Bank.

Congrats on the transaction. My first question is just to follow up on where you would likely focus on for future acquisitions? Is the target for still near-term producing assets? Or will you be focusing more on its stores and developers? And I think you touched on jurisdictions that, but just any focus on either near term or future exploration and development assets?

Sure. So I think, the bias will still be towards near-term cash flow opportunities. And as I mentioned before, we do have a robust pipeline pretty much across different time lines, whether that's near-term production development or exploration. But we've always been looking to grow kind of in all major buckets. So I think, it does allow us to grow across the board. But of course, naturally, near-term producing assets also have a higher dollar basis. So we probably could grow in all categories, but keeping in mind that the majority of the dollars will be going to near-term producing assets. So I would say that remains the bias, and it does allow us to just be countercyclical and invest across the value chain in a very accretive way.

And if I can follow-up on that. I think, you touched on the fact that you wanted to diversify your counterparts. And do you still have a requirement for those counterparts to be proven operators? Could they be maybe newer developers that are maybe other single asset developers for any near-term producing assets? Or are you still looking to maybe expand that counterpart of larger cap or multi-asset companies on the lithium front?

I think we're open to various alternatives. I think, that's been what we've -- we really focus on the asset. So it's a very discrete observation in the due diligence process, because we're of the view that the best mineral endowments ultimately find a very good producer or counterparty that develops those assets, similar to what happened with Neo Lithium, with that, they were a relatively small company when we acquired the Royalty, and they ultimately got acquired by Zijin, one of the world's largest miners in the world. So I think our position is that we want to acquire the best assets, the best royalties. And of course, counterparty risk is important to it, and it is a consideration. But I would say the most important consideration is making sure that it's a high-grade, low-cost asset with duration, because ultimately, they'll find a good home or if they're not already in a solid home already. And we've been seeing a lot of that very recently with all the acquisitions in the space with Rio Tinto and so all the transactions that we've seen. So we're still focused on acquiring the best assets out there.

Sounds good. And then if I may, just on the Zijin, Tres Quebradas asset specifically, you noted that you visited the site in November, which was very positive. I think in your press release, you noted that you expect contribution not earlier than the second half of 2025. How confident are you about Zijin's ability to start production in 2025 of that asset?

Sure. So I think, we'll have to really defer to them on kind of when production ultimately starts. But on our site visit and also when the public remarks, they have commented that they're looking to start production in 2025. As far as our observations on the site visit is that the Phase 1 is fully complete. The ponds have been filled for several years now. So they're incredibly well advanced. They're looking to even optimize the asset further by investing more into the solar plant over at the chemical site. So overall, we were very impressed by what they've been able to do. I mean, they've only owned the asset for 2.5 years. It's one of the most remote locations in the world at a high elevation, and they've been able to accomplish this in a short amount of time and they have the balance sheet to do so. So look, I think we're very excited by our partnership there. They are incredible host to us. But as far as the ultimate decision on when they start production, that's obviously a Zijin point. And the best thing for us, it's a revenue royalty with no exposure to OpEx and CapEx. So it's a lot of optionality for us.

Your next question is from Brian MacArthur from Raymond James.

I just want to go back to the capital allocation, because I think, that's obviously very important. But you bought 0.5% of this a year ago for $25 million in shares, and now we're selling it at 28. So I guess my real question is how much of the decision here was really made, because the share price is so low. And as you said, you can buy everything back much cheaper, because one of the challenges here is you buy back shares is liquidity in the stock as well, too. So I'm trying to figure out, is this as I said, really mostly capital allocation, because the shares are so undervalued? Or is it back to the other question that there's just a lot more opportunities than a year ago? And I get the point about taking down the size of your major assets. But I guess if the stock was $10, would you still do this deal?

Look, so I think, it's really for a variety of reasons. I think the ability to buy back shares was important, but not the main determination of this decision, having a robust pipeline was also. I think the fundamental driver is that this is a very accretive deal and the value that we were getting for this asset is much less than what we're able to crystallize today. So I think that was probably the fundamental driver that we were able to deliver at a very accretive deal, especially at the cycle low, replans the balance sheet and so forth. So I think that was really the driving force of the transaction. The ability to buy back shares and deploy capital in the space is obviously a secondary important consideration. But ultimately, the deal stands very solid by itself, and we're very excited by that opportunity. And we think it's a very accretive transaction, and that's really what drove the conversation.

There are no further questions at this time. Please proceed.

Thank you to everyone who joined us today. We expect to release our fourth quarter 2024 results after market close on March 17, 2025, with the conference call held on March 18, 2025 at 9 a.m. Thank you for your interest in Lithium Royalty Corp. Goodbye.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.